Hostname: page-component-76fb5796d-2lccl Total loading time: 0 Render date: 2024-04-26T04:31:59.233Z Has data issue: false hasContentIssue false
  • English
  • Français

Systemic Risk in Financial Services

Published online by Cambridge University Press:  25 November 2011

D. Besar ,
P. Booth ,
K. K. Chan ,
A. K. L. Milne  and
J. Pickles
Get access Rights & Permissions [Opens in a new window]

Abstract

The current banking crisis has reminded us of how risks materialising in one part of the financial system can have a widespread impact, affecting other financial markets and institutions and the broader economy. This paper, prepared on behalf of the Actuarial Profession, examines how such events have an impact on the entire financial system and explores whether such disturbances may arise within the insurance and pensions sectors as well as within banking. The paper seeks to provide an overview of a number of banking and other financial crises which have occurred in the past, illustrated by four case studies. It discusses what constitutes a systemic event and what distinguishes it from a large aggregate system wide shock. Finally, it discusses how policy-makers can respond to the risk of such systemic financial failures.

Keywords

Banking CrisisFinancial CrisisGlobal Financial CrisisFinancial DeregulationCredit CycleGovernanceControl MechanismsSystemic RiskFinancial InfrastructurePayment SystemsShort-term Funding MarketsCollateral ExposureSecuritiesDerivativesCounterparty RiskRecessionPension System
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 16 , Issue 2 , 25 November 2011 , pp. 195 - 300
Copyright
Copyright © Institute and Faculty of Actuaries 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acharya, V.V. (2009). A theory of systemic risk and design of prudential bank regulation. Journal of Financial Stability, 5(3), 224–255.CrossRefGoogle Scholar
Aikman, D., Alessandri, P., Eklund, B., Gai, P., Kapadia, S., Martin, E., Mora, N., Sterne, G., Willison, M. (2009). Funding Liquidity Risk in a Quantitative Model of Systemic Stability. Bank of England Working Paper No. 372.CrossRefGoogle Scholar
Allen, F., Babus, A. (2008). Networks in Finance. Wharton Financial Institutions Center Working Paper No. 08-07.CrossRefGoogle Scholar
Allen, F., Gale, D. (2000a). Bubbles and Crises. The Economic Journal, 110(460), 236–255.CrossRefGoogle Scholar
Allen, F., Gale, D. (2000b). Financial Contagion. The Journal of Political Economy, 108(1), 1–33.CrossRefGoogle Scholar
Allen, L., Jagtiani, J. (2000). The Risk effects of combining banking, securities, and insurance activities. Journal of Economics and Business, 52, 485–497.Google Scholar
Andrew, A.P. (1908a). Hoarding in the panic of 1907. The Quarterly Journal of Economics, 22(2), 290–299.CrossRefGoogle Scholar
Andrew, A.P. (1908b). Substitutes for cash in the panic of 1907. The Quarterly Journal of Economics, 22(4), 497–516.CrossRefGoogle Scholar
Baldassare, M. (1998). When Government Fails: The Orange County Bankruptcy. Public Policy Institute of California/University of California Press.CrossRefGoogle Scholar
Bernanke, B.S. (1983). Nonmonetary effects of the financial crisis in the propagation of the Great Depression. The American Economic Review, 73(3), 257–276.Google Scholar
Bernanke, B.S. (1995). The Macroeconomics of the Great Depression: A comparative approach. Journal of Money, Credit, and Banking, 27(1); Reprinted in Bernanke (2000), pp. 5–38.CrossRefGoogle Scholar
Bernanke, B.S. (2000). Essays on the Great Depression. Princeton, Princeton University Press.Google Scholar
Bernanke, B.S., James, H. (1990). The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison. NBER Working Paper No. W3488, October 1990.Google Scholar
Bernanke, B.S., James, H. (1991). The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison. In R.G. Hubbard (ed.). Financial Markets and Financial Crises. Chicago, University of Chicago Press; Reprinted in Bernanke (2000), pp. 70–107.Google Scholar
Bliss, R.R., Kaufman, G.G. (2006). Derivatives and systemic risk: Netting, collateral and closeout. Journal of Financial Stability, 2(1), 55–70.Google Scholar
Bolton, P., Santos, T., Scheinkman, J.A. (2009). Market and public liquidity. American Economic Review, 99, 594–599.CrossRefGoogle Scholar
Booth, P.M. (2007). “Freedom with Publicity” – The Actuarial Profession and Insurance Regulation from 1844–1945. Annals of Actuarial Science, 2(1), 115–146.CrossRefGoogle Scholar
Booth, P.M. (ed.) (2009). Verdict on the Crash: Causes and Policy Implications. Hobart Paperback, London, UK, Institute of Economic Affairs.Google Scholar
Bordo, M., Eichengreen, B. (1999). Is our current international economic environment unusually crisis prone? manuscript.Google Scholar
Bordo, M., Eichengreen, B., Klingebiel, D., Martinez-Peria, M.S. (2001). Is the crisis problem growing more severe? Economic Policy, 16(32), 51–82.Google Scholar
Boss, M., Elsinger, H., Thurner, S., Summer, M. (2004). Network Topology of the Interbank Market. Quantitative Finance, 4, 1–8.CrossRefGoogle Scholar
Brunnermeier, M.K. (2009). Deciphering the 2007–08 liquidity and credit crunch. Journal of Economic Perspectives, 23(1), 77–100.Google Scholar
Brunnermeier, M.K., Crickett, C., Goodhart, C., Persaud, A., Shin, H.S. (2009). ‘The fundamental principles of financial regulation’, Geneva Reports on the World Economy series no 11, Geneva, International Center for Monetary and Banking Studies (ICMB) and Centre for Economic Policy Research (CEPR), July, http://www.cepr.org/pubs/books/P197.aspGoogle Scholar
Burton, M. L., Hicks, M.J. (2005). Hurricane Katrina: Preliminary Estimates of Commercial and Public Sector Damages. Marshall University, Center for Business and Economic Resources. Retrieved December 15, 2005 from http://www.marshall.edu=cber=research=katrina=katrina-estimates.pdfGoogle Scholar
Calomiris, C.W., Mason, J.R. (2003). Fundamentals, panics, and bank distress during the Depression. The American Economic Review, 93(5), 1615–1647.Google Scholar
Cameron, R.E. (1967). Banking in the Early Stages of Industrialization: A Study in Comparative Economic History. New York, Oxford University Press.Google Scholar
Caprio, G., Klingebiel, D. (2003). Episodes of systemic and borderline financial crises. in D. Klingebiel and L. Laeven (eds). Managing the Real and Fiscal Effects of Banking Crises. World Bank Discussion Paper no 428, 31–49.Google Scholar
Cheng, L. (2003). Banking in modern China: Entrepreneurs, professional managers, and the development of Chinese banks, 1897–1937. Cambridge, Cambridge University Press.Google Scholar
Clæssens, S., Klingebiel, D., Laeven, L. (2004). Resolving systemic crises: policies and institutions Policy Research Working Paper Series 3377, The World Bank.Google Scholar
Collins, M. (1989). The Banking crisis of 1878. The Economic History Review, New Series, 42(4), 504–527.CrossRefGoogle Scholar
Conant, C.A. (1915). A History of modern banks of issue. New York, G.D. Putnam's Sons.Google Scholar
Cowling, K., Tomlinson, P.R. (2000). The Japanese crisis – A case of strategic failure. The Economic Journal, 110(464), 358–381.CrossRefGoogle Scholar
Degryse, H.A., Nguyen, G. (2006). Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System. TILEC Discussion Paper No. 2006-016.Google Scholar
Della Paolera, G., Taylor, A.M. (1999). Internal Versus external convertibility and developing-country financial crises: lessons from the Argentine bank bailout of the 1930s. NBER working paper series 7386.CrossRefGoogle Scholar
Demirgüç-Kunt, A., Karacaovali, B., Laeven, L. (2008). Deposit insurance around the World: A comprehensive database. World Bank Policy Research Working Paper 3628.CrossRefGoogle Scholar
Demirgüç-Kunt, A., Sobaci, T. (2001). Deposit Insurance around the World: A Database. World Bank Economic Review, 15(3), 481–490.CrossRefGoogle Scholar
Diamond, D.W., Rajan, R.G. (2009). Fear of fire sales and the credit freeze. NBER Working Paper 14925.CrossRefGoogle Scholar
Drees, B., Pazarbasioglu, C. (1995). The Nordic banking crisis pitfalls in financial liberalization. IMF Working Paper 61.Google Scholar
Eichengreen, B. (1992). Three perspectives on the Bretton Woods systems. NBER Working Paper 4141.Google Scholar
Eichengreen, B., Sachs, J. (1985). Exchange rates and economic recovery in the 1930s. The Journal of Economic History, 45(4), 925–946.CrossRefGoogle Scholar
Elsinger, H., Lehar, A., Summer, M. (2003). Risk Assessment for Banking Systems. 14th Annual Utah Winter Finance Conference Paper; EFA 2003 Annual Conference Paper No. 437.Google Scholar
Elsinger, H., Lehar, A., Summer, M. (2006). Risk assessment for banking systems. Management Science, 52(9), 1301–1314.CrossRefGoogle Scholar
Enoch, C., Baldwin, B., Frecaut, O., Kovanen, A. (2001). Indonesia: Anatomy of a banking crisis two years of living dangerously 1997–99. IMF Working Paper 01(52).Google Scholar
Farhim, E., Tirole, J. (2009). Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts. NBER Working Papers 15138, National Bureau of Economic Research, Inc.Google Scholar
Friedman, M., Schwartz, A.J. (1963). A Monetary history of the United States, 1867–1960. New York, National Bureau of Economic Research.Google Scholar
Freixas, X., Parigi, B., Rochet, J.C. (2000). Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank. Journal of Money, Credit and Banking, 32(3), 611–638.Google Scholar
Furfine, C. (2003). Interbank Exposures: Quantifying the Risk of Contagion. Journal of Money, Credit and Banking, 35(1), 111–128.CrossRefGoogle Scholar
Glick, R., Hutchison, M. (2001). ‘Banking and currency crises: How common are the twins?’. in R. Glick, R. Moreno and M.M. Spiegel (eds). Financial crises in emerging markets. Cambridge University Press, 35–69.CrossRefGoogle Scholar
Haldane, A. (2009). Rethinking the financial network. Speech delivered at the Financial Student Association, Amsterdam, April 2009. Available at http://www.bankofengland.co.uk/publications/speeches/2009/speech386.pdfGoogle Scholar
Hildebrand, P.M. (2008). The sub-prime crisis: A central banker's perspective. Journal of Financial Stability, 4, 313–320.CrossRefGoogle Scholar
Hoggarth, G., Reidhill, J., Sinclair, P. (2003). On the resolution of banking crises: theory and evidence. Bank of England Working Paper 229.Google Scholar
Hoggarth, G., Reis, R., Sapporta, V. (2001). Costs of banking system instability: Some empirical evidence. Journal of Banking & Finance, 26(5), 825–855.Google Scholar
Honohan, P., Klingebiel, D. (2000). Controlling the fiscal costs of banking crises. World Bank Policy Paper 2441.CrossRefGoogle Scholar
Honohan, P., Klingebiel, D. (2003). The Fiscal Cost Implication of an Accommodating Approach to Banking Crises. Journal of Banking & Finance, 27(8), 1539–1560.Google Scholar
Hoshi, T. (2001). What happened to Japanese banks? Monetary and Economic Studies, 29(1), 1–29.Google Scholar
IFSL. (2009). Pension Markets 2009. February, London.Google Scholar
Jacome, L.I. (2004). The late 1990s financial crisis in Ecuador: institutional weaknesses, fiscal rigidities, and financial dollarization at work. IMF Working Paper 12.Google Scholar
Jaffee, D., Russell, T. (2002). Extreme events and the market for terrorist insurance. NBER Insurance Conference.Google Scholar
Johnson, H.C. (1998). Gold, France, and the Great Depression: 1919–1935. New Haven, Yale University Press.Google Scholar
Jonung, L., Hagberg, T. (2002). How costly was the crisis? Tyovaen Akatemia, Kauniainen.Google Scholar
Jorion, P. (undated). Orange County Case, available online at http://www.gsm.uci.edu/jorion/oc/case.htmlGoogle Scholar
Kane, E.J. (2008). Resolving systemic financial crises efficiently. Pacific-Basin Finance Journal, 10(2002), 217–226.CrossRefGoogle Scholar
Kashyap, A.K., Rajan, R.G., Stein, A. (2008). Rethinking capital regulation. Maintaining Stability in a Changing Financial System. Jackson Hole, Wyoming, Federal Reserve Bank of Kansas City.Google Scholar
Kay, J. (2009). Narrow banking: the reform of banking legislation. Centre for the Study of Financial Innovation, London.Google Scholar
Klingebiel, D. (2000). The use of asset management companies in the resolution of banking crises cross-country experiences. World Bank Policy Research Working Paper 2284.CrossRefGoogle Scholar
Krozner, R.S. (1999). Can the Financial Markets Privately Regulate Risk? The Development of Derivatives Clearinghouses and Recent Over-the-Counter Innovations. Journal of Money, Credit and Banking, 31(3), 596–618.CrossRefGoogle Scholar
Laeven, L., Valencia, F. (2008). Systemic banking crises: A new database. IMF Working Paper 224.Google Scholar
LaPorta, R., De-Silanes, F.L. (2002). Government ownership of banks. Journal of Finance, 57(1), 265–301.CrossRefGoogle Scholar
Milne, A. (2009). The fall of the house of credit. Cambridge, Cambridge University Press.CrossRefGoogle Scholar
Milne, A., Onorato, M. (2009). Risk-adjusted measures of value creation in financial institutions, working paper.Google Scholar
Minsky, H.P. (1986). Stabilizing an unstable economy. New Haven, Yale University Press.Google Scholar
Miranda, M.J., Glauber, J.W. (1997). Systemic risk, reinsurance, and the failure of crop insurance markets. American Journal of Agricultural Economics, 79(1), 206–215.CrossRefGoogle Scholar
Mishkin, F.S. (2009). Is Monetary Policy Effective during Financial Crises, American Economic Review Papers and Proceedings, conference version downloadable from www.aeaweb.org/annual_mtg_papers/2009/Google Scholar
Morris, S., Shin, H.S. (2003). Liquidity black holes. Review of Finance, 2004, 8(1), 1–18.Google Scholar
Nakamura, L.I., Zarazaga, C.E.J.M. (2001). Banking and finance in Argentina in the period 1900–35. FRB Philadelphia Working Paper 01(7).Google Scholar
Nakaso, H. (2001). The financial crisis in Japan during the 1990s: How the Bank of Japan responded and the lessons learnt. BIS 6.Google Scholar
Newman, M. (2003). Random graphs as models of networks. in S. Bornholdt and H.G. Schuster (eds). Handbook of graphs and networks, Wiley-VCH, Berlin.Google Scholar
Nier, E., Yang, J., Yorulmazer, T., Alentorn, A. (2008). Network Models and Financial Stability. Bank of England Working Paper No. 346.Google Scholar
OECD (2008). Pension Markets in Focus Issue 5, December, OECD.Google Scholar
OeNB (2006). Systemic risk monitor: risk assessment and stress testing for the Austrian banking system, mimeo.Google Scholar
Øksendal, L. (2007). Re-examining Norwegian monetary policy in the 1930s. Manuscript.Google Scholar
Pröpper, M., Van Lelyveld, I., Heijmans, R. (2008). Towards a Network Description of Interbank Payment Flows, DNB Working Paper No. 177.Google Scholar
Reid, M. (2003). The Secondary Banking Crisis, 1973–75: Its Causes and Course. London, Macmillan (1982)/2nd ed., Hindsight, London (2003). ISBN 9780954156725.Google Scholar
Reinhart, C.M. (2002). Default, Currency Crises, and Sovereign Credit Ratings. World Bank Economic Review, 16(2), 151–170.Google Scholar
Reinhart, C.M., Rogoff, K.S. (2008a). Is the 2007 US sub-prime financial crisis so different? An international historical comparison. American Economic Review, 98(2), 339–344.Google Scholar
Reinhart, C.M., Rogoff, K.S. (2008b). Banking crises: An equal opportunity menace. NBER working paper series.Google Scholar
Reinhart, C.M., Rogoff, K.S. (2009a). The aftermath of financial crises. NBER working paper series.Google Scholar
Reinhart, C.M., Rogoff, K.S. (2009b). This Time is Different: Eight Centuries of Financial Folly. Princeton University Press.Google Scholar
Romer, C.D. (1990). The Great crash and the onset of the Great Depression. The Quarterly Journal of Economics, 105(3), 597–624.Google Scholar
Sanhueza, G.I. (2001). Chilean banking crisis of the 1980s: Solutions and estimation. Working Paper of Central Bank of Chile 104.Google Scholar
Schwartz, A.J. (1986). Real and pseudo financial crises in F. Capie and G.E. Wood (eds). Financial crises and the world banking system, 11–40.CrossRefGoogle Scholar
Swagel, P. (2009). The Financial Crisis: An Insider View Brookings Papers on Economic Activity, Spring 2009.Google Scholar
Teichova, A.V., Hentenryk, G.K., Ziegler, D. (eds) (1997). Banking, trade and industry: Europe, American and Asia from the thirteenth to the twentieth century. Cambridge University Press.Google Scholar
Temin, P. (1976). Did monetary forces causes the Great Depression? New York, W.W. Norton.Google Scholar
Temin, P. (2008). The German crisis of 1931: Evidence and traditional. Cliometrica: Journal of Historical Economics and Econometric History, 2(1), 5–17.Google Scholar
Theberge, A. (1999). The Latin American debt crisis of the 1980s and its historical precursors. Columbia University Working paper.Google Scholar
Toivanen, M. (2009). Financial Interlinkages and Risk of Contagion in the Finnish Interbank Market. Bank of Finland Research Discussion Paper No. 6/2009.Google Scholar
Turner, A. (2009). The Turner Review: A Regulatory Response to the Global Banking Crisis, the UK Financial Services Authority, March and published as a .pdf on www.fsa.gov.uk/pages/Library/Corporate/turner/index.shtmlGoogle Scholar
UBS (2005). Moving from a theoretical to a real liability. UBS Global Equity Research, London.Google Scholar
Ueda, K. (1998). Causes of the Japanese banking instability in the 1990s. FAIR-Wharton Conference, Tokyo.Google Scholar
Upper, C. (2007). Using Counterfactual Simulations to Assess the Danger of Contagion in Interbank Markets. BIS Working Paper No. 234.Google Scholar
Upper, C., Worms, A. (2004). Estimating Bilateral Exposures in the German Interbank Market: Is There a Danger of Contagion? European Economic Review, 48(4), 827–849.CrossRefGoogle Scholar
Valencia, F. (2008). Banks’ precautionary capital and credit crunches. IMF Working Paper 8(248).Google Scholar
Vogler, R. (2001). The genesis of Swiss banking secrecy: Political and economic environment. Financial History Review, 8(1), 73–84.Google Scholar
Wells, S. (2004). U.K. Interbank Exposures: Systemic Risk Implications. Journal of Monetary Economics, 2(1), 66–77.Google Scholar
White, E.N. (1981). State-sponsored insurance of bank deposits in the United States, 1907–1929. The Journal of Economic History, 41(3), 537–557.Google Scholar
White, L.J. (1991). The S&L debacle: Public policy lessons for bank and thrift regulation. Oxford, Oxford University Press.Google Scholar
Wicker, E. (1996). The banking panics of the Great Depression. Cambridge, Cambridge University Press.Google Scholar
Wolf, M. (2009). Fixing the global finance: How to curb financial crisis in the 21st century. New Haven, Yale University Press.Google Scholar
Young, A.N. (1971). China's nation-building effort, 1927–1937: The financial and economic record. Stanford, Stanford University.Google Scholar